Tuesday, March 28, 2006

Cyclical-But Not Structural- Upswing in Europe

Several economic indicators published today in Europe, including business confidence numbers from Italy and Germany, showed unexpected strength. This makes a
rate hike from the ECB by May a near certainty, it may (although that is still unlikely) even come as soon as next week.

The problem is that this recovery seems entirely cyclical. Money- and credit figures published by the ECB today showed that year over year money supply growth accelerated from 7.6% to 8.0% in February while private sector credit growth accelerated from 9.6% to 10.3%. Illustrating my previous point about how the two previous quarter point hikes have been too little, too late.

Meanwhile, too illustrate that the conditions for a structural, sustainable boom in Europe have not improved, the mass protests against the modest liberalization of labor laws in France have continued and indeed increased in strength. While this proposed liberalization can and should be criticized for not going far enough, that is not what the protesters object against. They have the opposite objection , with the imbecile argument that because unemployment is so high with the current system, the current system should not be changed.

These protests now appear likely to succeed, and the proposal will now likely be withdrawn entirely or at least watered down even more.

The protests will thus not only create short-term disruptions for the French economy, they will also prevent any of the structural reforms needed to improve its long-term prospects. Again, the reform per se was relatively modest and wouldn't have had much effect anyway, but if a reform as modest as this can't be implemented, then no French government will dare implement any more radical reforms, thus ensuring the long-term stagnation of the French economy.


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